ESRI Budget Perspectives 2012 by Annette J Dunlea
The annual Budget Perspectives Conference, co-hosted by the Economic and Social Research Institute (ESRI) and the Foundation for Fiscal Studies (FFS), provides a forum for discussing key public policy issues of both immediate and longer term concern. Against the current backdrop of major economic and fiscal challenges,budgetary policy must be seen to support Ireland’s return to a sustainable growth path. At a time when expenditure cuts are needed and more tax revenue must be generated, equity issues are of great importance to social solidarity. Research on the allocation of benefits and tax burdens allows these equity issues to be addressed systematically.This year’s conference provides an opportunity for policymakers, social partners and researchers to engage on some of the major issues. The papers presented at the conference cover both macroeconomics and the microeconomics of public expenditure and taxation.
The macroeconomic environment continues to be volatile and has become more complex in the past year. Ireland is now under the ‘management’ of the European Central Bank, the International Monetary Fund and the European Commission (the ‘Troika’).It is unavoidable that Ireland will have to cut public expenditure on healthcare in the forthcoming budget. Healthcare is one of the major items of budgetary expenditure,currently accounting for over a quarter of the total. Careful pruning of expenditure is necessary to limit the negative impact on front line services and on equity. Two papers address this important area.One way of reviewing the effectiveness of health spending is to look at health expenditures and outcomes across countries. This is the approach taken in the first paper on health expenditure by Michael Borowitz, Valerie Moran and Mark Pearson (OECD). They suggest that there is considerable scope for improved efficiency in the Irish healthcare sector in areas such as primary care, acute hospitals and pharmaceuticals. At the same time, they caution against attempts at large scale reforms because research shows that in many countries such actions have often proved costly and yielded little benefit.Charles Normand (TCD) looks at how expenditure on healthcare in Ireland has changed over time. He points to the potential for improved efficiency by changing the incentives in the current system and emphasises the need to ensure value for money from the total expenditure on health and not merely from public expenditure.As we face our fourth ‘austerity’ budget since the start of the economic crisis, we hope that the return to growth will help to ensure that the fiscal targets for 2012 and beyond will be met successfully.
Over the last decade Irish tax policy has undergone dramatic shifts. As the economy boomed in the early 2000s, income tax rates were reduced, tax credits were increased and the standard rate band was widened. Social welfare benefits were increased substantially over the same period. However, with the onset of the crisis in 2007/2008, the taxes that the government had increasingly relied upon during the boom years – such as stamp duty and capital gains taxes – collapsed, creating an urgent need for new revenue generation. The introduction of income levies later replaced by the Universal Social Charge significantly increased the revenue from taxes on income.2 Welfare payments, particularly for those of working age, were reduced.
The recession and the crisis in the public finances have seen unemployment rise sharply while taxes on those in employment (including the Universal Social Charge)have risen sharply. There has been concern that this combination may weaken the financial incentive to move from unemployment into employment, and selective examples have been used to support this argument. We showed how such examples can be misleading, failing to take into account the range of factors affecting both benefit entitlements and potential earnings in work. Results using a microsimulation approach and a large scale nationally representative sample point to quite different results. The replacement rate – the ratio of out of work to in work income, one of the standard measures of work incentives – was below 70 per cent for more than 8 out of 10 unemployed people in 2011. Only a small minority – about 3 per cent – faced replacement rates of over 100 per cent. Looking at changes over time, we found that the incidence of high replacement rates (over 70% or 80%) was greatest in 1987 and 1994 and lowest in 2000. Between 2008 and 2011, the incidence of high replacement rates fell. For example, the proportion with replacement rates above 70 per cent fell from 26% to 18% (as against the low of 13% in 2000). These results suggest that measures taken already between 2008 and 2011 have served to maintain a significant financial incentive to work for most unemployed people. A small minority are faced by higher replacement rates,requiring a targeted response rather than one which penalises all those who are unemployed.Our earlier work on this topic (Callan et al, 2007) pointed to two aspects which deserve further attention. First, the Rent
and Mortgage Supplement scheme rules out those who are in full time employment,with no corresponding support for those in low paid employment. Second, the medical card scheme is also of an “all or nothing” nature. The proposals of the Expert Group on Resource Allocation and Financing in the Health Sector (2010) involved a tapering of entitlements which could avoid the sharp loss often associated with moving from unemployment into employment.
Marginal effective tax rates have increased significantly for most workers, largely reflecting the introduction of the income levies/ Universal Social Charge. The large changes observed moving from 2008 to 2011 policy are amplified by the generous, but unsustainable tax and welfare policy that was in place in 2008. Comparing the changes from 2000 policy and 2011 the changes are more muted, although an overall decrease in the financial incentive to progress is still evident.Some points of comparison with other countries are now being investigated. The distribution of METRs by family type is broadly similar to those seen in the UK (Adam and Browne, 2010). In particular a significant number of one?parent families and couples with children, where one partner does not work, are faced with a very weak financial incentive to increase earnings. It would be interesting to extend this comparison to other countries throughout Europe; in this respect there is potential for the use of EUROMOD – the tax?benefit microsimulation model for Europe to broaden comparisons beyond the UK.New research finds that 8 out of 10 unemployed people would increase their income by at least 50 per cent if they were to obtain a job. 6 out of 10 would more than double their income if they could find a job. These results refute the impression created by selected non-typical examples that most unemployed people are “better off on the dole”.The analysis is based on the ESRI’s tax-benefit model, which uses a nationally representative sample of real people rather than selected examples. The model simulates the welfare entitlements and tax liabilities of each household in the CSO’s Survey on Income and Living Conditions. This comprehensive approach finds that about 3 per cent of the unemployed would have a lower income in work than out of work.Potential entitlements of unemployed people to Rent and Mortgage Supplements are taken into consideration – but latest figures show that only 13 per cent of those on Jobseeker Assistance or Benefit receive Rent or Mortgage Supplement. These results also take into account the age and educational qualifications of the unemployed – so that their potential earnings are likely to be below average. Between 2000 and 2008 income tax rates were cut and credits were increased. Consequently the public finances became highly dependent on revenues from sources related to the bubble – such as stamp duties and capital gains taxes. Since 2008 taxes on those in employment have been increased sharply in an attempt to rebalance revenues. The net impact has been that a substantial proportion of all workers face significantly higher marginal tax rates in 2011 than they would have under simple indexation of 2000 policy in line with earnings growth:about 1 in 6 workers faces a marginal effective tax rate which is 10 percentage points higher in 2011 than under the 2000 regime. A further 1 in 4 workers faces marginal effective tax rates which are between 5 and 10 percentage points higher than under 2000 policies. Speaking at the conference, Professor Tim Callan said “Income-related taxes – such as the Universal Social Charge – have done most of the heavy lifting in raising revenue. Future tax policy needs to look at taxes which are less directly linked to income, but still have regard to ability to pay. A property value tax could be designed to meet this criterion.”
The fall out from the economic crisis has hit the Irish health system hard. However,the issues which policymakers are attempting to address in Ireland are not that different from those that are facing policymakers across the developed world.Health spending has gone up dramatically faster than income levels. This is not necessarily a cause for concern. The richer a person – or country – is, the more health is valued and on average, higher health spending is associated with better health outcomes. But overspending, underspending and mis?spending are rife in all health systems that of Ireland included. There is little doubt that there are – in theory – enormous gains to be made by spending health funds more wisely. The much more difficult question is how to realize these gains. Health reforms which
look promising on paper have a habit of disappointing when they are implemented.This is where careful assessment of international experience can be of use, to point to some areas where efficiency gains are not just available, but are also realizable.The first section of the paper examines the performance of the Irish health system by examining health outcomes achieved given its level of spending. Ireland has made considerable progress in improving health outcomes. Life expectancy has improved considerably, but it is still lower than a significant number of OECD countries. Much of the improvement in health outcomes can be attributed to rising levels of income and education, however, the health system also plays an important role. Cardiovascular mortality has dropped significantly. Some of this decline can be attributed to improved access to treatment and also to secondary prevention through the treatment of high blood pressure and cholesterol. However, there are still important gaps in the quality of health care, in particular avoidable hospital admissions for primary care. Cancer mortality in women remains very high with Ireland having some of the poorest rates of survival for breast and cervical cancer.Ireland also exhibits elevated risk factors for disease with rates of smoking prevalence and alcohol consumption among the highest in OECD countries.Ireland has experienced one of the highest growth rates in health spending amongst OECD countries. The growth rate has been even faster if growth is measured against overall national spending (GNP) (McDaid et al. 2009).2 Despite this increased spending, human and physical resources devoted to health remain relatively low.Ireland has one of the lowest levels of physicians per 1,000 population, especially general practitioners in primary care. At the hospital level, Ireland is on a par with the OECD average with regard to total number of beds and average length of stay although the latter has increased slightly in recent years.
The second section of the paper examines the efficiency of the Irish health system based on a recent study by the OECD (OECD, 2010a). This study uses Data Envelopment Analysis (DEA) to investigate the relationship between health system inputs and outcomes. Ireland has relatively poor health outcomes given the amount of money spent on health. This suggests there is wide scope for efficiency gains in the Irish health system. However, this study also investigated the relationship between health system characteristics and efficiency and divides health systems into six different clusters based on their organizational characteristics and it finds that no type of health system performs consistently better than another. There is in fact greater variation in efficiency within groups than between groups. Calls to move towards the Dutch system, or the English system, or the systems of any other country neglect this point: some countries manage to operate health systems much more efficiently than other countries with essentially similar systems. Whatever health system is chosen, it needs to be managed and administered well. This suggests that improved efficiency can be achieved by making marginal changes
rather than requiring a “big bang” reform.
The final section looks at some specific policy options. It draws on a decade of work by the OECD on best practices in improving value for money in health care and highlights some key areas for potential efficiency gains in Ireland (OECD 2010a).There is wide scope for improving efficiency of pharmaceuticals, primary care and hospitals in Ireland. Primary care needs large?scale support including organizational reforms to improve better prevention and care coordination for chronic diseases.The Primary Health Care (PHC) teams envisioned for a decade have not fully materialized and those that are in place have not been supported with new provider
payment methods such as pay for performance which could reward increased activity and quality in primary care. In the case of hospitals, there is probably scope for improved efficiency by greater concentration of services and expanding activity? At the moment, Irish people have an inequitable and inefficient health system. The new government has announced its intention to move towards the Dutch (or Swiss) model of competing insurance providers. The new system looks likely to be more equitable than the current system, but whether it will also improve efficiency is open to question. The Dutch model has theoretical attractions as a basis for promoting efficiency, but these efficiency gains have been difficult to realise in practice. Indeed, expenditures have increased rapidly in the Netherlands, reflecting the loss of central control over prices and quantities of health care and the apparent ineffectiveness of competition in encouraging providers to become more efficient. Hence the challenge for Ireland is to make the new system work well: there is a risk otherwise that the result of its reforms will be equitable access to an inefficient system.This paper has looked at the Irish health system from the perspective of OECD lessons on health care reform when money is tight. It suggests there is considerable scope for improved efficiency of the health sector in Ireland particularly in primary care, hospitals, and pharmaceutical policy. The paper also argues that no single type of system is inherently more efficient than another and that attempts at large scale reforms have often been costly with limited improvements in health outcomes. This certainly appears to have been the case in the Netherlands, which is of particular interest given that the proposed Irish reforms look to have been inspired by the Dutch reforms. As Ireland contemplates the future direction of health reform, it is worth reflecting that no country has found the right solution.
Irish Health System Improving but Could be Better Value for Money By Michael Borowitz, Valerie Moran, Mark Pearson (OECD).Health outcomes have improved significantly in Ireland, partly due to rapid increases in health expenditure prior to the economic crisis. However, an OECD review of the Irish health system shows that it could be more effective – improving outcomes further at no additional cost. Ireland’s health spending has increased more rapidly than other countries in recent years and is now on a par with the OECD average of 9.5% of GDP, up from 6.1% of GDP in 2000. Life expectancy has risen considerably and infant mortality and cardiovascular mortality have declined significantly. However, important gaps remain in the quality of health care. Too many people are treated in hospitals for diseases that should be handled by primary carers and deaths due to breast and cervical cancer are high relative to other countries. Rates of smoking and alcohol consumption are among the highest of all OECD countries, which will lead to many preventable early deaths. The Irish health system is currently inequitable and inefficient. The new government intends to move towards the model of competing insurance providers. This can increase equity in access to health care, but there is no guarantee that it will improve efficiency. There is no ‘ideal’ health system among OECD countries; rather, what matters is how well a system is managed.OECD recommendations to improve efficiency and value for money in Ireland include: to reduce unnecessary hospital costs, reorient primary care to ensure better prevention and care coordination for chronic diseases. Improve hospital efficiency by concentrating services and expanding activity-based payments such as DRGs.Allow essential pharmaceuticals to be dispensed outside hospital settings, especially for chronic diseases, using generic drugs at internationally competitive prices.
The budget for health and social services in Ireland represents 27% of total government expenditure (Department of Finance 2010) and is the largest programme of government spending on goods and services (the second largest spending programme after social protection). It is important to understand the drivers of health care expenditure and to look at ways in which growth in spending can be contained and the best uses be made of these resources. There are particular features of public expenditure on health services in Ireland that lead to waste and perverse incentives (Ruane Report 2010), and better resource allocation arrangements could help to accommodate the growing demands on the system without proportionate increase in spending. The topics covered in this chapter focus on the recent patterns of health care expenditure in Ireland, key drivers of costs and of potential savings, access to care and entitlements, and the capacity and organisation of health care delivery. These topics are put into the context of the particular features of health care finance and provision that lead to high levels of government funding and regulation of health services. Since international comparisons of health care expenditure form a key focus of another paper in this volume these are used here only to illustrate issues of specific interest in the choices faced in Ireland.
This section on health care outlines the patterns and changes in patterns of expenditure on health and social services in Ireland. There was rapid growth in public and total health expenditure in Ireland from 2001, with public spending rising by 112% over the period. Per capita public spending on health services rose by 78% during this period because of the rise in population of over 19%. While spending has risen more rapidly than the overall population, the facilities and some other parts of the healthcare delivery infrastructure have not increased in line with the growing population. When comparisons are made with other western European countries Ireland historically had lower than average percentages of national income spent on health services, but is now at a similar level to comparable European countries.
The level of health care expenditure (both public and private) will remain an issue in Irish economic policy, and will not be greatly affected by any decisions to change the structure of this expenditure. There is no simple answer to the question of how much should be spent on health services, and therefore no answer to the related question of the adequacy of current funding levels. However, with increased efficiency it would be possible to increase access and activity to the extent that many current problems would be removed. Changing incentives could lead to more efficient use of available resources, and improve access and the experience of care.In the current climate it is probably more important to focus on improving use of existing resources rather than debating their adequacy. However, since this might change the mix of public (or quasi public) and private spending it is important to look at the overall value for money from health expenditure rather than only at the public part.From a macroeconomic perspective the structure of health spending is less important that the absolute levels. To some extent the lack of collective systems of financing for primary and community care may be leading to undesirable behaviours (from a macroeconomic perspective) as households self insure by increasing savings.As outlined above, there are ways in which it is feasible to control health care spending without reducing access to care, and the effects of ageing and technology on costs has been poorly understood and exaggerated in much of the policy debate. It is clear that improving the health system will require changes in patterns of entitlements, and the extent to which access to care is prepaid will increase.Growing demands will need more explicit priority setting, and that may not be popular. However the fact that the population remains relatively young, and that there are significant inefficiencies in the current provision makes it possible to manage the changes needed within affordable budgets. Health care finance and delivery are highly complex. There is a risk that the solutions sought are overly simple.
Public expenditure on health services in Ireland represents a quarter of all government spending, and has grown rapidly over the last decade. Growth in spending has not brought a proportionate increase in the availability and quality of services. This paper draws on evidence from Ireland and abroad to understand better why this has occurred, and considers how the health sector might address growing demands for services within available resources.Public funding has remained at around 80% since the 1980s, and the share of private insurance has been around 8%. What is unusual in Ireland is that private insurance covers nearly half of the population for some services, and that most people pay out of pocket for primary care. These structures have unintended and in some cases undesirable effects on choices made by patients and service providers. Improving efficiency in the use of health service resources requires changes in who is entitled to what. The paper reviews evidence on the scope for greater efficiency (and suggests that significant improvements are feasible) and reviews the drivers of greater demands. While it is argued that the cost consequences of population ageing will be more limited than widely expected, the fact that the population overall is growing is a source of serious pressures. It is also argued that increased expectations about what should be available will increase demands for care. The current capacity of the health system is limited, and there will be need to invest in better facilities and training. The government has embarked on an ambitious programme of health care reform. The final section of the paper considers challenges that come from the reform process, and how to avoid pitfalls encountered in previous reforms here and abroad.
Causes Annette Dunlea Supports
The National Council of The Blind, Ireland